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Tag: management agreement

A creditor’s exclusive remedy against a debtor who is a member or manager of a limited liability company (LLC) is a charging order on the debtor’s distributional interest.

McClandon v. Dakem & Associates, LLC, (see here), a recent Florida appellate case, illustrates that while the charging order remedy is flexible enough to allow for some creative lawyering, it still has limits.

McClandon’s facts are straightforward: the plaintiff obtained a money judgment against an individual who had an interest in several limited liability companies. In post-judgment proceedings, the plaintiff sought a charging order against the debtor’s LLC interests. The court granted the charging order and appointed a receiver to take control of the LLCs’ finances.

The debtor appealed.

Partially reversing the charging order’s terms, the appeals court found the trial court exceeded its authority and encroached on the legislature by giving the receiver managerial control over the LLCs.

Section 605.0503 of the Florida LLC statute permits a court to enter a charging order as a creditor’s exclusive remedy to attach a debtor’s interest in a multi-member LLC. The statute further provides that a court can apply broad equitable principles (i.e., alter ego, equitable lien, constructive trust, etc.) when it fashions a charging order. Florida’s LLC act is based on the Revised Uniform Limited Liability Company Act of 2006 which specifically provides that a court can appoint a receiver to assist in collection of a debtor’s LLC distributions. See RULLCA Section 503(b)(1).

The court had discretion to appoint a receiver to help the creditor foreclose on the charging order against the debtor’s LLC interests. But the court exceeded its boundaries by giving the Receiver expansive management authority over the LLC’s finances.

Since there was no statutory predicate for the court to allow the Receiver to exert managerial control over the LLCs, the trial court’s charging order was overly broad.

Afterwords:

The charging order remedy lends itself to flexibility and creative lawyering. While a creditor can have a receiver appointed to assist in collecting LLC distributions, the receiver cannot – at least in Florida and other states following the Uniform LLC Act – exert control over the LLC’s financial inner workings. When petitioning for a receiver, creditor’s counsel should make sure the receiver does not engage in the management of the LLC’s business operations.

The facts: in 2002, plaintiff’s predecessor (the former office building owner) entered into lease with defendant law firm. Over the next few years, the Lease was amended three times to cover three different office suites – each bigger than the last and each requiring increased rent payments. Tenant defaulted and the building’s management company filed suit. Tenant vacated and the parties went to trial on money damages. Over the course of several hearings, and after the court substituted in the current building owner as the plaintiff, the trial court entered judgment for landlord, awarding nearly $70,000 in back rent plus attorneys’ fees over over $12,000. The Tenant law firm appealed.

Held: Judgment for landlord affirmed.

Reasoning: The appeals court rejected the law firms three key arguments: (1) that there was no privity of contract between plaintiff and tenant; (2) plaintiff materially breached the lease by renting less space than called for in the lease and over-charging the tenant; and (3) the trial court erroneously found that tenant was leasing the office suite for a “flat-rate” instead of leasing for a specific square footage amount. (¶¶ 45-56).

On the privity issue (privity doctrine basically requires that a party have some contractual relationship with the party being sued), the Court noted that the plaintiff wasn’t the lessor.

The original plaintiff was the former owner’s management company and the substituted plaintiff was the building’s current owner.

The Court held that privity was a question of standing (only a party to a contract has standing to sue on it) and an affirmative defense that had to be pled and proved by the tenant. Since the tenant failed to raise the privity/lack of standing defense by affirmative defense or motion to dismiss, the tenant didn’t meet his burden of proving the plaintiff’s lack of standing to sue. (¶¶ 50-51).

Tenant also argued that the landlord’s material breach precluded it from suing to enforce the lease. The tenant claimed that while the lease provided for nearly 4,000 square feet of rentable space, the landlord was only leasing under 3,000 square feet. The tenant claimed it overpaid the landlord nearly $100,000 for the shortened space.

The court rejected this argument stating that there was no evidence that the precise number of square feet of rentable space was a material term. One of the law firm’s principals even testified that the square footage wasn’t a make-or-break issue: the firm simply wanted “more space” than the prior suite.

The Court also affirmed the trial court’s finding that the tenant was agreeing to pay a “flat rate” rather than a specific price per square foot. (¶¶ 52-55).

Take-aways: I’ve represented commercial landlords where the lease will have changed hands multiple times from lease signing to the date of trial. When representing a property manager whose name differs from the one on the lease, I move to admit in evidence any management agreement between the owner/lessor and the property manager.

Another case lesson is that a lease square footage discrepancy will only be considered a material term if the lease says so.